A vital job to do, under severe constraints

The Davis Tax Committee, whose task is to review South Africa’s tax system to assess whether it helps or hinders economic growth and job creation, finds itself in a straightjacket.

The committee, appointed by former finance minister Pravin Gordhan, has already done a considerable amount of work and, in an update that Judge Dennis Davis gave to the recent Tax Indaba, his frustration was apparent. The committee is trying to eke out efficiencies in a system that leaves very little room for meaningful change, and the potential for changes to the tax system to influence economic growth rates is limited. There are other issues that need to be tackled. For one thing, Judge Davis told the Tax Indaba that he was "hamstrung by the culture of corruption".

The committee handed its first report, on small and medium enterprises, to the minister in December. Only two of several recommendations in the report were accepted.

The full report has not been published, and Judge Davis laments that his committee does not have the power to publish its own reports, as is the norm for ministerial committees.

The committee is adamant its findings and recommendations will be based on empirical evidence. "It is no use doing a tax review on the back of a cigarette box," says Judge Davis.

It is using empirical research already done by organisations such as the World Bank as well as major global professional services firms.

"Our direct taxes (personal and corporate income tax) are progressive because they are having an effect on the reduction of poverty," the judge says. "The effect is not enough, but that is not because tax can do more. It is because there are other things we have to deal with." Michael D’Ascenzo, former commissioner of taxation of the Australian Tax Office, agrees. The country is at a crossroads in terms of its tax system — or perhaps a T-junction, he says, to emphasise that the choices are limited. "Tax is not going to be the solution in itself, whether it is to solve the problems in Australia or in South Africa," Mr D’Ascenzo says. "It is only one part of a bigger picture." The personal income tax burden on the top decile of taxpayers in South Africa is enormous. Judge Davis says: "It is quite hard to conceive how we would get vast amounts of money, in an economically efficient way, if we are to increase the personal income tax when 86.9% is already paid by the top decile." There is room for a "wealth tax" on the super-super rich — not the people who have R6m or R7m — but that is not going to deliver the "pot of gold" the country needs, he says.

According to the 2013 Tax Statistics Report, published by the Treasury and the South African Revenue Service, only 2,539 individuals had a taxable income higher than R5m in 2012.

Meanwhile, the contribution from corporate income tax is on the decline. The number of companies with a taxable income of R200m and more dropped from 258 in 2009 to 137 in 2012. They paid R40.7m of the assessed tax in 2012, down from R67m in 2009.

"By and large it is quite hard to conceive how we can increase the rates," the judge says.

"It would be silly if we increase the corporate tax rate when we want to create a proper investment climate." In a first for any committee or commission looking at the tax framework, the Davis Tax Committee has commissioned the World Bank to do a study on the VAT gap in South Africa — the difference between what should be collected and what is collected. This is not about fraud or tax evasion; rather, it looks at the administration of VAT, such as whether the right people are in the net, whether they are paying the right amounts and whether refunds are paid as they should be.

The World Bank has done studies on the VAT gap and found it to be between 12% and 13% in the UK.

"We need to know these figures. We want sound empirical data and maybe by the end of the year or next year we will have it," Judge Davis says.

Given the constraints on the other two major taxes, VAT seems to be the obvious area where some wriggle room might be found. South Africa’s standard VAT rate of 14% is far below the average rate of 20%-25% in other African countries.

"If we up the rate by two percentage points (to 16%), we can get a significant amount of money and perhaps smooth out some of the discrepancies we have," Judge Davis says.

But VAT is a regressive tax in that it places a disproportionate burden on the poor. In the basket of consumption by the poorest decile in South Africa, only 36% goes to food that is zero-rated. The rest of the spending by this group attracts VAT.

"The answer is transfers," Judge Davis says, meaning cash in people’s pockets, as through social grants.

"Economic literature indicates overwhelmingly not to have three or four (VAT) rates," he says. "It is a disaster, it is inefficient and complex and subject to fraud." Multiple VAT rates create complications for sellers of goods and services at the point of sale and in their record-keeping, as well as for tax authorities.

"You could only up the (standard VAT) rate if you have more significant transfers for targeted poverty relief," Judge Davis says.

"The question again is, how can you have more significant transfers if you do not have confidence in the transfer system?" he asks, referring to corruption and inefficiency.

He points to a World Bank study on the tax structures of 13 middle-income countries, including SA. It found SA had the most redistributive system of the 13. The government’s social spending is already 17.6% of gross domestic product (GDP).

"I would be lying if I were to say there were not significant levels of corruption in our society. But the World Bank study is saying that, notwithstanding these problems, the system is working quite well in terms of what it purports to achieve.

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